Nicholas Nassim Taleb coined the term Black Swan to explain how massive unforeseen events have the greatest impact on markets. But only the most naïve and optimistic of investors was not expecting further fallout from the abominable banking sector.

Bradford & Bingley (B&B), like Northern Rock, RBS, Alliance & Leicester, Barclays and HBOS before it, is in the spotlight and in a lot of trouble.

The company has launched a £258m rights issue at an offer price of 55p a share. They are set to issue a profit warning. Steven Crawshaw has stepped down as CEO. And they have agreed to sell 23% of their shares to Texas Pacific Group (TPG) Capital, a US private equity firm for £179 million.

This “perfect storm” hit the firm so hard that the FSA were forced to come in and suspend trading in the shares.

The downturn in the buy-to-let housing market means the UK’s eighth largest bank, from £3 billion in 2006, now is worth a mere £404m — less than Dignity funeral care. Which is shocking, viewed in isolation.

But, I’m pretty blasé about all of these rights issues and share plunges. Anything happening in the banking sector is a write-off (pun intended). Regular readers know that I’ve no interest in bottom-fishing for ‘bargain’ banks.

Despite my antipathy, I have been constantly advised to pile into banking shares. In the past 3 months I’ve been told:

To buy Barclays at 510p; the shares are now 363p;
To buy RBS at 330p; now 222p;
And to buy HBOS at 497p; now 368p.

All three tips were made, among other things, on the basis of big dividend yields, which seem to cover a multitude of sins.

Except they don’t. All three tips have incurred a greater capital loss than their total annual dividend payout would compensate for. And, none of these three firms is paying a dividend in cash. They’re paying them in shares instead.

This only serves to hurt the per share profitability, which lowers the already low share price… not what the dividend hunters signed up for.

The world’s worst stock tipper

I will no doubt receive another tip for Bradford & Bingley. Why do the tippers persevere with banks?

Because the culprit ultimately responsible for all of these tips is still at large, pushing bank stocks like never before.

Let me now reveal to you who that culprit is. This is today’s the print-out from my Bloomberg terminal, objectively ranking stocks by their value credentials:

1. Bradford & Bingley, Score: 99:89
2. Alliance & Leicester, Score: 83.96
3. HBOS, Score: 80:86
4. Barclays, Score: 78.68
5. RBS, Score: 76.42

Blame the machines.

Across the entire UK stock market, banks are the five best value investments around today. And it’s not just Bloomberg… running any value ‘stock screen’ from Reuters, to Digital Look, to Zacks, to ADVFN produces the same result. This is what every investor and fund manager has been seeing on their screens since late-October.

In objective terms, these are the shares to buy. But anyone who’s been following this advice over the last 12 months has lost, and lost big.

There are two ways to look at investments, bottom-up and top-down.

Bottom-up investing uses stock-screens — systems that zero-in on company fundamentals. Think of it as tunnel-vision investing. In a bull-run, it is a great way to buy stocks. I used to build stock screens for a critically-acclaimed investment service, so I can personally testify to how effective they can be.

Top-down investing is quite different. This method is far more big picture. The first question is not ‘What company should I look at?’ It’s ‘What assets should I look at?’

Top-down investors are not only looking at numbers, but at sentiment and market opportunities outside of a machine’s scope.

While neither method is perfect, in a market downturn it is essential to think big.

Bottom-up investing can lag reality — in the 2000 bear market, stock screeners were picking out the companies that had fallen hard and were more value trap than value opportunity. The same thing is happening here. A system is not a substitute for common sense.

If the market falls by 20%, you have to sit up, take notice and, depending on the portfolio, take action.

The fallout was an opportunity to re-evaluate and find safe-havens for your money. Those who did this have profited in the last six months. Those who had well diversified portfolios in a variety of sectors have probably broken even.

Those who held the ‘good value’ banks, house-builders and retail stocks must now take drastic action to pull things back.

Theo Casey

Source: Bradford And Bingley’s White Swan Event

If you’re wondering what I’m talking about, today is Tax Freedom Day — the day when the average worker in Britain has earned enough to pay their tax bill.Apparently it’s fallen one day earlier than in 2007. However, it’s a full seven days later than it was when New Labour first came to power. We now spend, on average, one week more than we did simply working for the Government.

That’s why I admire Robin Tracey. Because for Robin, EVERY day is Tax Freedom Day!

I’ll explain what I mean by that below. First, though, let’s dive into today’s Big News…

Bradford and Bingley shares suspended

Bradford and Bingley (B&B) had its shares suspended by the FSA this morning, following a 30% fall. The mortgage lender, which is heavily exposed to the Buy-To-Let market, is expected to miss forecast profits by £100 million. Chief executive Steven Crawshaw has stepped down. B&B is expected to do a rights issue.

But amidst all the hullabaloo, Texas Pacific Group is buying what, to our eyes, looks like an eye-wateringly expensive 20% stake.

Do they know something the rest of us don’t? Theo Casey takes a closer look, and also makes the case for looking beyond simple value investing…

Has the tide turned for interest rates?

“Nobody can convince me that we’re able to boost economic growth with a lax monetary policy.”

The words of Klaus Liebscher there, one of the European Central Bank’s (ECB) monetary policy gurus.

Hear hear!

Liebscher went on to say that eurozone inflation is “very high” and that the ECB’s price stability mandate is “more than urgent” (what “more than urgent” means I’m not sure — perhaps this is a mistranslation…)

The bond market has the scent of a rate rise in its nostrils. Not that long ago, the market was pricing in a rate cut by the end of the year. Now the opposite position holds sway. Bond fans expect rates will rise.

Does this mean policy makers are finally taking inflation seriously? Well, the ECB has been hawkish for some time now. But what about closer to home? What’s happening on Threadneedle Street? Let’s take a look…

My oh my! We have a bit of a tussle on our hands, folks! A bone of contention has arisen between the Bank of England and the Treasury. Mervyn King, the Bank’s Governor, wants to promote Professor Charles Bean to the post of Deputy Governor when Rachel Lomax steps down.

But the Treasury is unhappy with the proposal. The other Deputy Governor is Sir John Gieve, whom the Treasury has criticised for not being ‘City-savvy’ enough.It fears promoting an academic to be the other Deputy will unbalance the Monetary Policy Committee. Cynics have suggested that the Treasury wants a City-friendly face simply because that’s more likely to lead to a policy the Government finds agreeable.

Though no-one’s said so (yet), I suspect they’re also uncomfortable with the idea of someone called Mr Bean wielding so much power over economic affairs…

Tension between a central bank and a government is a good thing. We neither want nor need monetary policy makers who kow-tow to politicians. King seems so far to be putting up a fight — perhaps he’s stung that I said he’s not as hard as ECB boss Jean-Claude Trichet…

It’s too early to say whether we’re now on a hawkish path. There’s a strong case to be made that rates should indeed go up — but whether that case has been heeded is another matter.

China on the cheap

Manraaj Singh had a quiet one last week. He was here, but spent most of his time holed up in his emerging markets den.

Today, we’re beginning to see the fruits of Manraaj’s labour. Two stocks which he believes typify why right now is a great time to be getting into China.

These aren’t formal recommendations, just interesting case-studies. But they make very interesting reading.

Find out why one of these stocks looks even better value than one of Warren Buffett’s new favourites!

Make every day Tax Freedom Day

OK, now I’ll satisfy your curiosity. Robin Tracey has a hobby which makes him hundreds of thousands of pounds a year. And he doesn’t pay a penny of tax on that money.

How? Because Robin makes his money from spread betting. And spread betting is tax free!

Spread betting is, of course, also risky. But Robin takes it all in his stride — because he’s been using his strategy for over a decade now, and knows that it works.

Recently he’s begun sharing his strategy with others, and the results have been phenomenal. One member of the public who’s copied Robin’s moves calls it a “near guaranteed income strategy”.

So if you’ve a bit of money to play with, and fancy putting it to work without the Government taking a bite out of the profits, why not check out Robin’s strategy?

Find out how, with only a few minutes a month, you could generate a tax-free second income from the comfort of your own home

Until tomorrow

Ben Traynor

Source: What If You Could Make EVERY Day Tax Freedom Day?

Shares of WaMu soared 29% higher Monday on the rumor, which pulled most financial stocks along for the ride. It was the biggest gain for WaMu shares in 25 years. Indeed, it does sounds like a big gain, until you realize the stock has plunged 75% in value over the past year.

Meanwhile, TPG is a premiere private equity firm (well connected with the Bush family). Surely they wouldn’t be putting their hard-earned cash to work in a shaky bank. Right?

The reality is that TPG is hardly spending paper-money – that is to say actual cash – on this deal. Like so many other private equity outfits, hedge funds and other “distressed asset” investors, TPG’s equity capital is highly leveraged up. They’re investments are typically leveraged 10 to 1… 25 to 1…perhaps even 100 to 1. Who knows? So TPG is buying with “plastic” not paper money – just like so many Americans do at the mall.

Buy me US$7 billion worth of WaMu shares…and charge it please!

WaMu needs the cash – after reporting US$3 billion in mortgage loan losses and other assorted (or sordid) asset write offs. That’s just a drop in the bucket compared to the staggering total of US$232 billion (and still counting) in world-wide financial sector losses suffered so far in this credit crunch market shock.

WaMu shareholders should at least feel somewhat relived, even though their existing ownership interest in the bank will be sharply diluted. The alternative however could be much worse.

The good news for other investors – or for would-be bargain shoppers – in the financial sector is that this deal is another signal that the “all’s-clear” has been sounded in the global banking sector.

Don’t get me wrong: There will still be PLENTY of losses recorded this quarter, next quarter, and beyond. The credit crunch isn’t over yet. Mortgage rates are still uncomfortably high. And who knows how much lower home prices will go – triggering even more loan defaults and foreclosures ahead.

Still, it’s worth remembering that the stock market is a “discounting mechanism.” Share prices often bottom well ahead of the fundamentals. In fact, the S&P 500 Index already suffered a decline of nearly 19% from its October 2007 high, to the March low, so the benchmark blue-chip stock index may already be three-fourths of the way through this bear market.

Historically speaking, the average U.S. bear market since 1940 lasted about 13 months. Interestingly, on average 74% of the bear market decline was over (in terms of time) by the time the market crossed the -20% mark. Also, there have been quite a few market corrections that stopped just short of the down-20% threshold that commonly defines a bear market.

The bulls are crossing their fingers that last week’s rally was something more than just another dead-cat bounce. It certainly looks to me like this rally might have more legs than previous upside moves that proved to be false-starts.

The question now is: Should bullish investors buy with paper or plastic?

MIKE BURNICK, Senior Editor & Global Market Analyst